European Association of Public Banks
- European Association of Public Banks and Funding Agencies -
1
Markt-ESC@cec.eu.int
European Commission
DG Internal Market
Brussels, 24 April 2003
Dear Sir/Madam,
We would like to thank you for the opportunity to comment on the DG Internal Market
Services' working documents ESC 12/2003, 13/2003 and 14/2003. The documents were published by the EU Commission on 10 March 2003. The European Association of Public
Banks (EAPB) represents approximately 100 public banks and financing institutions from 8
European countries. Public banks, funding agencies and national associations of public banks are direct members of the EAPB. Our position paper will provide you with our general observations and concerns regarding the working documents on the implementing provisions:
Article 6 (Possible legitimate interests for issuers to delay public disclosure)
We also welcome the fact that Article 6 (2) takes account of the dual board system which is prescribed by law in a number of EU Member States. The rule/exception principle as applied in this Article should be reversed, however. The mechanism currently envisaged, whereby a decision taken by the management board must, in principle, be publicly disclosed even if it has not yet been approved by the supervisory board (cf. Article 5 (1), Article 6 (2)), would prejudge the supervisory board’s decision and would thus fail to pay sufficient regard to the underlying legal concept. This requires the board to exercise control over the running of the company by the management board under certain circumstances by giving or withholding its express approval. In such cases, a management board resolution only becomes effective after formal approval by the supervisory board. The management board’s decision should therefore be disclosed only after this approval has been given. Only in certain isolated instances where the supervisory board has already clearly indicated its approval and a resolution may thus be regarded as a pure formality it would be appropriate to disclose the management board’s decision. Articles 5 and 6 of the working document should therefore
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European Association of Public Banks
- European Association of Public Banks and Funding Agencies -
2 envisage that if the issuer has a dual board system, public disclosure will, in general, be required only when the necessary approval of the supervisory board has been obtained or, in other words, public disclosure of a management board decision can, in general, delay such a pending approval. This would take account of the legal concept of the respective roles of the management and supervisory boards.
In addition to this, Art. 6 (2) should contain a clarification that legitimate interests of an issuer justifying the postponement of the disclosure of insider information may even exist if the respective case cannot be subsumed under the two groups of cases mentioned under
Art. 6 (e.g. if there is a risk to the existence of the issuer, if a disclosure would put the economic interests of the issuers seriously at stake although there is a prospect of the issuer's financial recovery; cf. no. 70 (2) of the CESR advice dated 31 December 2003).
Otherwise there might be a danger of an excessively stringent interpretation of the term of an issuer's 'legitimate interests' which would be at odds with the notion behind the market abuse directive (cf. Art. 6 (2).
Article 8 (Signals to be taken into account for possibly manipulative behaviours)
Contrary to the approach adopted under Art. 2 and 3, in the field of market manipulation
(Art. 8), the proposal unfortunately does not confine itself to the regulation of basic aspects.
The list of signals contained therein which need to be taken into consideration in an assessment of potentially manipulative behaviours and includes mere interpretation tools for the person applying the law. These tools are based on wording and regulatory context and should facilitate the categorization of certain market events on a case-by-case basis.
Therefore, at most, it should be located at Level 3.
Precautionary we would like to point out that the current wording ”In order to guide market participants and competent authorities when examining behaviours which could constitute...” in Art. 8 (1) is in need of some clarification. In the current version of your description of Art. 8 this provision lists signals to be taken into account “before and after” an order has taken place. This list however is very wide and very onerous to be fulfilled. The directive itself has set up different levels and kinds of duties to examine behaviour which is unified by Art. 8. Competent authorities possess comprehensive powers “to examine behaviour” which is based on Art. 12 of the directive. Market operators possess special powers “to examine behaviour” based on Art. 6 (6) of the directive. Other market participants such as investment services providers do not have any specific duties to carry out these examinations set out by the framework directive. But, these firms and their staff members are expressively addressed in the working document. Art. 8 fails to introduce legal certainty and is therefore misleading. Art. 8 includes a number of terms that are defined in ways out of sync with existing EU or national legislation. Therefore Art. 8 should only address to market operators and competent authorities.
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European Association of Public Banks
- European Association of Public Banks and Funding Agencies -
3
In principle, we see it as very positive that the working document on the recommendations governing 'recommendations' focuses on fundamental regulatory aspects. Nevertheless, we would like to mention the view that the scope of the Level 2 implementing measures for
Article 6 (10) in combination with paragraph 5 is too broad and is partly also not covered by the legal foundation (market abuse directive). Against this background, we would like to comment on the individual Articles as follows:
Article 1 (Definitions)
Difficulties with the scope of the suggested definition of 'recommendation' demonstrate that it lacks a concrete point of reference, such as an issuer or a financial instrument which is the subject of research. With this in mind, we would like to refer to our proposal for a definition as per Article 6 (5) of the market abuse directive:
'Research is written or electronic information containing a financial analysis of individual issuers who have issued shares as defined in Article 1 (4) of the Investment Services
Directive (93/22/EEC). It contains information that appears to be a reasonable basis for an investment decision and a concrete investment recommendation.'
In addition to this, we regard a clear differentiation from investment advice as necessary; in the planned ISD the aim is to give investment advice a higher profile by way of redefining it as investment service. It should be made clear that research – unlike investment advice – does not take account of the customer's individual circumstances.
It would also be worth considering the inclusion of a non-exhaustive list of explicit exemptions from the scope of the directive. Such a list might be based on the NASD and
NYSE rules, for example (NASD-Rules 2711 (a)(8) und NYSE-Rule 472.10 (2)). Under NASD
Rules 2711 (a)(8) and NYSE Rule 472.10 (2), research does not include, among other things:
 publications which examine indices and do not contain recommendations of specific securities;
 purely economic analyses which do not recommend any specific securities;
 technical analyses of industries or indices; summaries of certain financial figures from various companies which do not comment on the data in detail;
 information on expected positive or negative developments in certain industries or sectors which does not contain any recommendations of specific securities;
 warrant calculations;
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European Association of Public Banks
- European Association of Public Banks and Funding Agencies -
4
 morning notes;
 internal memos which are not made available to customers.
Article 5 (General standard for disclosure of interests and conflicts of interest)
This Article has an impact on integrated houses and has implications on the current rules and regulations. Under the current rules, Chinese Walls and disclosure stand on an equal footing as ways of managing conflicts of interest. Referring to the directive, CESR is of the opinion that the tool of the disclosure is the only way to deal with conflicts of interest. Under the new ISD proposal it appears that there will be a primary duty to manage all conflicts of interest through Chinese Walls or other organisational methods; this disclosure is only acting as a back-up where the other methods do not provide sufficient assurance that the conflict has been adequately managed.
Article 6 (Additional conditions for disclosure of interests or conflicts of interests)
Under Art. 6 (1), first indent, in line with CESR, the 'Major Shareholdings' which need to be disclosed are now given as 5% and more. Since this is intended to be a minimum standard, it may be anticipated that some Member States will set more stringent rules. In particular countries which already have rules in place are unlikely to change them unless they fall short of the EU standard. But differing rules are at odds with the need for globally active companies, in particular, to include a standard disclaimer in their research. We therefore suggest that if an EU-wide threshold is established for the disclosure of major shareholdings, this should be a binding, not a minimum requirement at Level 2. The method of calculating the percentage of shareholdings should also be standardised as far as possible. The question of whether or not the trading portfolio has to be included in such calculations as well as the investment portfolio already gives rise to legal uncertainty, and varying interpretations from one Member State to another would constitute a further obstacle to standard disclaimers. Irrespective on what amount the threshold is set, therefore, the level should at least be the same throughout Europe.
Chapter III (Disseminators of recommendations produced by third parties)
The implementing directive makes a clear distinction between the obligations incumbent upon the person drawing up analyses ('producers of recommendations' under Art. 2 – 6) and those obligations merely devolving upon persons distributing third-party analyses
('disseminators' under Art. 7-9). Yet, this distinction is only suited to the field of secondary analyses. Firstly, it remains unclear, where exactly the demarcation line lies between mere dissemination of an analysis of a third-party on the one hand and the preparation of an own analysis by drawing upon one or several external analyses. This uncertainty should be clarified, in order to prevent an objectively unjustified and unfeasible accumulation of
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European Association of Public Banks
- European Association of Public Banks and Funding Agencies -
5 obligations for an analyst drawing upon third-party analyses. Such a kind of clarification could be provided by way of a more precise definition of the term 'producer' to include all those who appropriate – either entirely or partly – third-party analyses, because in those cases there will be an own analysis. By way of derogation from Art. 9, 3rd indent there should be a clarification that Art. 7 to 9 is not applicable whenever the latter is the case.
However, if the disseminator renounces to a disclosure of the authorship, then, from the point of view of the investor, there is an 'appropriation' of the analysis on the part of the disseminator. Hence, the disclosure obligation will be exclusively based on his conflicts of interests. The fact whether the disseminator is under the obligation to disclose the authorship, is a matter which exclusively concerns the internal relations between the producer and the disseminator and cannot be regulated by the implementing directive.
Notwithstanding the question whether the choice of a regulation as a legal instrument is permissible and fit for purpose with regard to the implementation of the directive, we welcome the basic regulatory content of the regulation. However, we do not believe that it is appropriate to limit the safe harbour for buy-back programmes to the cases referred to in
Article 2 (scope of application). The list of reasons for share buy-back programmes contained under Article 2 should at least not be understood as exhaustive. Buy-back programmes are often decided on with other purposes in mind, such as a future acquisition.
We see no good reason why such buy-back programmes should be excluded from the safe harbour. Furthermore, buy-back programmes are subject to numerous company law rules, such as a requirement for approval by the general shareholders’ meeting. These should be the main criteria for determining their legitimacy. Legally legitimate buy-back programmes – irrespective of their intended purpose – should therefore always fall within the scope of the safe harbour, provided that all other rules prescribed by the directive are complied with.
With kind regards,
European Association of Public Banks
Christoph Wengler Germaine H. Klein
Avenue de la Joyeuse Entrée 1 – 5, B-1040 Brussels ● Phone : +32 / 2 / 2 / 286 90 62 ● Fax : +32 / 2 / 2 / 231 03 47
Website : www.eapb.be